 Chapter 4 Learning Objectives

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Chapter 4 Learning Objectives
1 Calculate and interpret the market value and market value added of a public corporation. 2 Calculate and interpret key measures of financial performance, including economic value added (EVA) and rates of return on capital, assets, and equity. 3 Calculate and interpret key measures of operating efficiency, leverage, and liquidity. 4 Show how profitability depends on the efficient use of assets and on profits as a fraction of sales. 5 Understand how a company’s sustainable growth depends on both its payout policy and its return to equity. 6 Compare a company’s financial standing with its competitors and its own position in previous years.

Chapter 4 Outline Corporate Performance Measured Market Value Added Economic Value Added Book Rates of Return: Return on Capital, Return on Assets, Return on Equity Financial Ratios Assessing the Investment Decisions: Measuring Efficiency, Measuring Profitability Assessing the Financing Decisions: Measuring Leverage, Measuring Liquidity The Du Pont System Calculating Sustainable Growth The Role of Financial Ratios and Transparency Basic idea of this chapter: The financials (balance sheet, income statement) and market values act as the foundation. Financial ratios are the building block that help diagnose corporate performance. 2 2 2 3 2 2

Three Primary Ways to Measure Corporate Performance:

Market Capitalization —Total market value of equity, equal to share price times the number of shares outstanding Market Value Added —Market Capitalization – Book Value of Equity

Market Capitalization = Total market value of equity, equal to share price times the number of shares outstanding Market Value Added = Market Capitalization – Book Value of Equity (i.e. does the market believe the firm’s value exceeds its book value) Market-to-Book Ratio = (Market Value of Equity)/(Book Value of Equity) Limitations of MVA: 1. Market value reflects investors’ expectations about future performance, complete with the imprecisions that come with all forecasting. 2. Market value fluctuates frequently due to reasons outside of the financial managers control. 3. Privately owned corporations do not have a public market value. 思考 AT&T公司和 Home Depot公司 相似的 MVA，不同的市價對帳面價值比率 為什麼？

Economic Value Added = Operating Income minus the product of cost of capital and total capitalization Operating Income = Net Income + After-tax Interest Cost of Capital = The minimum acceptable rate of return on capital investment Total Capitalization = Total Long-term Capital = Equity + Bonds + other Long-term capital [all capital committed by debt and equity investors] 定義 : * 營業淨利 = 稅後淨利 + 稅後利息 ; ROC = 資本報酬率

Economic Value Added = Operating Income minus the product of cost of capital and total capitalization Operating Income = Net Income + After-tax Interest Cost of Capital = The minimum acceptable rate of return on capital investment Total Capitalization = Total long-term capital = Equity + Bonds + Other Long-term Capital [all capital committed by debt and equity investors] Return on Capital = (Operating Income)/(Total Capitalization) 思考 Coca-Cola公司和 Google公司 相似的EVA，不同的資本報酬率 為什麼？

Return on Capital = Net income plus after tax interest (this sum is known as operating income) as a percentage of long-term capital (known as total capitalization) Average Total Capitalization = The average of the beginning and end of year value of equity and long-term debt

Return on Assets = Net income plus after-tax interest (this sum is known as operating income) as a percentage of (average) total assets

Return on Equity = Net income as a percentage of average total equity

Efficiency Ratios – Ratios which measure how efficiently a firm uses its assets. * 兩個公式都是求算資產週轉率的合法方式 7

Efficiency Ratios – Ratios which measure how efficiently a firm uses its assets. 此一比率如何衡量效率性？ 7

Profitability Ratio — Measures the profits generated from sales. Note: ROC, ROA, ROA and EVA are also typically considered profitability ratios. 說明 : ROC, ROA、ROE 和 EVA 通常也都視為獲利性比率 3

Leverage Ratios – Measures the extent to which a firm is funded by debt 此一比率如何衡量槓桿？ 3

Note: COGS stands for Cost of Goods Sold. Expenses include selling, general and administrative costs (and “store operating costs” in this example).

Liquidity Ratios– Ratios which measure the extent to which the firm has sufficient liquidity in the coming year. Net Working Capital = Current Assets – Current Liabilities 5

The Quick Ratio is sometimes referred to as the Acid-Test Ratio 6

Lowe’s 公司的淨營運資金對資產總額比率

ROA 產業拆解 Discussion: For a given level of ROA, which firms have returns driven by turnover? By margin?

The last ratio in the DuPont breakdown of ROE is a measure of the firm’s debt burden. The denominator represents free cash flow (Cash available for distribution to investors after the company has paid for any new capital investment or additions to working capital.). If the ratio is close to zero, the firm has a heavy debt burden—much of its free cash flow goes to interest payments. 17